An extremist, not a fanatic

February 28, 2016

Like most economists, I’m minded to oppose Brexit. This isn’t because I’m an admirer of the EU: it is an unlovely institution. I’m as unmoved by appeals to European ideals as I am by talk of sovereignty or British national identity. Instead, for me, this is merely a pocket-book issue – are we better off in or out? – and I’m unconvinced by the outers’ case.

If it could be shown convincingly that leaving the EU would lead to us being an open, free-trading country I’d be tempted. But I doubt this is the case. I doubt we’d get good free trade treaties, especially as these will be negotiated by men lacking competence or goodwill. More likely, as Paul says, such treaties will be distorted by lobbyists and special interests, so we’d end up with something worse than TTIP. Granted, free trade with the EU would be in everyone’s interests: but a glance at the euro zone’s macroeconomic policy suffices to show that the EU cannot be relied upon to act in its citizens’ interests.

But even if I’m wrong, the journey to being a liberal free-trading nation will be a choppy one. As Michael Emerson says, Brexit is “a very messy prospect, with years and years of negotiation lying ahead in a climate of uncertainty over the outcome”. Such uncertainty could dampen capital spending and investment in exporting activity sufficiently to offset for a very long time the benefits of freer trade – especially as those benefits will themselves take years to be reaped.

I agree with the outers that being in the EU ties us to a sclerotic and dysfunctional economy. Carl is right to deplore the EU’s fetish with austerity, and Andrew is right to say that there are risks to staying in. But I interpret these arguments differently. We are tied to the European economy not by mutable political agreements but by brute geography; all countries trade a lot with their near-neighbours. Even outside the EU, we would be vulnerable to its economic mismanagement. (I’m tempted to add that, in the EU, we have a chance of mitigating that mismanagement, but I fear this would be too optimistic.)

So far, I’ve assumed that the case for leaving is that it would be a step towards an open forward-looking economy. But I fear that this is not what many outers want. Let’s face it: at least some of them are reactionary bigots who see withdrawal from the EU as a means of imposing tougher immigration controls. Even leaving aside their illiberalism, these would probably be badfor the economy.

Similarly, Michael Gove’s hope that any government money saved by Brexit could be invested in science and technology seems to me naïve. For one thing, insofar as Brexit depresses GDP it would reduce tax revenue, which folk like him would regard as a reason to cut spending. And for another, I fear it’s more likely that, if there is a windfall, it would be used for tax cuts for the better off. Net, science funding might be jeopardized by Brexit.

I know I should dissociate the case for Brexit from some of the deeply unattractive personalities who support it – but I’m struggling to do so.

In saying this, I don’t mean to say that Brexit would be disastrous. It wouldn’t be. Even on the harshest calculations, it would probably cost less than austerity has cost us, and the immediate costs of heightened uncertainty could be offset by looser fiscal policy. On the spectrum from Neil Woodford’s view that the economic argument about Brexit is “completely bogus” to Cameron’s claim that Brexit would be the “gamble of the century”, I’m closer to Woodford. Our relationship with the EU is a big issue in the media because of the psychiatry of the Tory party, not because the economic stakes are large.

This raises the question: what might change my mind?

If it could be shown that EU membership were a binding constraint against liberal socialistic wealth-enhancing policies such as a citizens income, worker democracy or non-cretinous macroeconomic policy, I’d favour Brexit. For now, however, the obstacles to these policies are to be found nearer home.

February 25, 2016

If businesses can increase productivity there is less likely to be a risk of higher unemployment as a result of the introduction of the National Living Wage.

This is true only in a very particular sense. In other senses, increasing productivity means raising unemployment.

Let’s start with the definition of productivity. It is value-added (GDP) per hour worked. This definition tells us that there can only be four ways in which productivity can rise. To see them, take the case of the Rovers Return*.

One way in which it could raise productivity would be simply for Michelle to cut their hours and expect Sean, Eva and Sarah to spend less time lounging around and more time serving customers.

In this sense, the claim that the NLW will raise productivity is the same as the claim that it will reduce employment.

So, how can Ms Broughton possibly be right?

It’s because there’s a second possible way in which productivity can rise. Workers could produce more value-added. For example, Sean, Sarah and Eva could mix fancy cocktails instead of pouring pints. If so, the Rovers customers would pay more for the better service, thus covering the higher wage costs.

A third possibility is that the Rovers could get more customers, so the same number bar staff will produce more value-added.

This will not happen because the NLW shifts income from employers to workers, thus redistributing income from people who have a low propensity to spend to those who have a higher one. For one thing, Corrie’s employers, such as Michelle and Carla (aka the future Mrs Dillow), in fact spend a lot. And for another, workers at Underworld will see their higher wages partly offset by lower tax credits. The upshot will be a cut in aggregate demand.

How, then, might Michelle attract more customers? She could promote the pub better, for example by having karaoke or singles nights. But these have already been tried, with mixed results. If there were obvious ways for the Rovers to get more punters, they would have been tried by now.

This leaves only one last possibility: Michelle could try to raise prices. She could get away with this, because demand is relatively price-inelastic; the Flying Horse will probably raise prices too. Value-added per worker would thus rise because customers are paying more for their beer. However, this would leave the Rovers’ customers with less to spend elsewhere. Roy and Dev might therefore suffer a loss of demand – although it’s unlikely Dev will sack Erica as a result.

Overall, then, I fear that if the Rovers is to increase productivity, it will happen by cutting hours. This is just what the OBR expects. It expects total working hours to fall by four million by 2020 as a result of the NLW (p204 of this pdf.)

Productivity, though, is not the only margin of adjustment. Michelle might simply accept the higher wage costs and the lower profits they imply. Or she might try to employ younger bar staff: the NLW only applies to over-25s.

Whichever it is, the NLW will impose costs upon someone. It is not a magic money tree.

* Almost all issues in economics can be understood through football or Corrie.

February 23, 2016

In making a libertarian case for Bernie Sanders, Will Wilkinson draws attention to an awkward point for right-libertarians – that inequality is the enemy of freedom.

He points out that Denmark –the sort of country Sanders wants the US to be more like – has greater economic freedom than the US. This, he says, “illustrates just how unworried libertarians ought to be about the possibility of a Denmark-admiring, single-payer-wanting, democratic socialist president.”

Will is not taking freak cases here. My chart plots a measure of income inequality (taken from the World Bank) against the Heritage Foundation’s index of business freedom – their measure of how government regulates firms – for 26 developedish nations. There is a slight negative correlation between them, of 0.16. If anything, I’m biasing the chart against the point I want to make: if I were to exclude Malaysia, which is free and unequal, or include Chile (which is unfree and unequal) the negative correlation would be much greater.

Inequality doesn’t just reduce freedom for workers. It reduces freedom for business owners too.

Will says this is because countries that want to tax and redistribute must have a healthy economy, which requires business freedom. I suspect that there are two other mechanisms at work.

One is that many of the rich have no interest in economic freedom. They want to protect extractive institutions and the monopoly power of incumbents from competition. They thus favour red tape, which tends to bear heavier upon small firms than big ones. This, I suspect, explains why inequality and unfreedom go together in Latin America, for example.

Secondly, people have a strong urge for fairness. If they cannot achieve this through market forces, they’ll demand it via the ballot box in the form of state regulation. As Philippe Aghion and colleagues point out, there is a negative correlation between union density and minimum wages: minimum wage laws are more likely to be found where unions are weak. Regulations, in this sense, are a substitute for strong unions – and, I suspect, a bad substitute because they are more inflexible.

Through these mechanisms, inequality is the enemy of freedom even in the narrowest right-libertarian sense of the word.

That said, it doesn’t follow that people who want greater income equality will necessarily promote economic freedom: Megan McArdle might be right to say that Sanders can’t or won’t much enhance it. We should, though, ask: what sort of egalitarian institutions and policies might increase freedom?

For me, the answer is clear: those which increase workers’ bargaining power. This means fuller employment and a jobs guarantee; stronger trades unions; and a citizens’ basicincome. The point here is that if workers have the power to bargain for better wages and conditions, and the real freedom to reject exploitative demands from bosses, then we’ll not need so much business regulation. In this sense, greater equality and cutting red tape go together.

What don’t go together – in the real world – are inequality and freedom. So-called right-libertarians therefore have a choice: you can be shills for the rich, or genuine supporters of freedom – but you can’t be both.

February 22, 2016

Just how big an issue is Brexit? Cameron says it is “one of the biggest decisions this country will face”. Gove says it’s “the most difficult decision of my political life.” But is it?

The best economic case for exit I’ve seen comes from Patrick Minford, who estimates the gains to leaving at around 10 per cent of GDP: these come from less regulation and freer trade with non-EU countries. On the other hand, John Van Reenen and colleagues think Brexit might cost us up to 10 per cent of GDP, as we face trade barriers with the EU.

There are big uncertainties here, such as what sort of trading regimes we’d face outside the EU, and how big are trade multipliers: to what extent does trade (pdf) encourage innovation?

Two things make me sceptical about big estimates, however. One is a paper by John Landon-Lane and Peter Robertson. They point out that, give or take a standard error, rich national economies grow at pretty similar rates over the long-run. This, they say, implies that “there are few, if any, feasible policies available that have a significant effect on long run growth rates.”

The second concerns the maths of economic growth, described by Dietrich Vollrath. Even if Brexit does raise our potential growth rate, it would take many years for the economy to reap those gains. He says:

Even if [insert policy here] opens up a big gap between potential and actual GDP, this doesn’t translate into much extra growth. In fact, the effects are likely so small that they would be unnoticeable against the general noise in growth rates year by year…Massive structural reforms are not capable of generating immediate short-run jumps in growth rates.

Let’s, though, put my scepticism aside and put those 10 per cent-ish numbers into context. Even 10 per cent might well be less than the cost of the financial crisis and subsequent bad economic policy: if GDP per head had grown at its 1990-2008 rate since 2008, it would now be 14 per cent higher than it actually is.

In macroeconomic terms, therefore, the Brexit debate is less important than the question of how to close the GDP gap that’s opened up since 2008.

Which poses the question: why is the Tory party fixated on the former whilst paying so little attention to the latter? The most respectable reason is that Brexit isn’t just an economic issue at all, but is instead about sovereignty and national identity. A less respectable one is that it is about tribal fissures within the Tory party, and careerist manoeuvring to exploit those divisions.

This is one reason why, if we must have a referendum on this matter, I would rather it were a demand-revealing referendum in which people vote not simply “leave” or “remain” but rather a sum of money to express their estimate of the cost of them of leaving or staying.

One great virtue of such a scheme is that it forces the protagonists to maintain a sense of proportion. Picture the scene. Someone on the Today programme is putting the case for leaving. John Humphrys then asks: “OK Mr Gove/Farage/whoever. How much will you pay to leave?” The nature of the debate is thus transformed, from high-blown hyperbole to a sober assessment of the costs and benefits.

As it is, I fear we’ll be hearing too much hyperbole and misplaced certainty and not enough perspective and doubt. Worse still, I suspect that the media – including much of the BBC – will be complicit in this distortion of the debate.

February 21, 2016

One of my first reactions to the row about anti-semitism at Oxford University Labour Club was: why are the silly sods paying so much attention to Israel-Palestine given that the issue seems to drive so many people insane? In my time, it was apartheid that bothered us, not Israel.

But then it struck me: to today’s students, apartheid is distant history. Nelson Mandela was freed in 1990, seven or eight years before today’s first-year undergraduates were born. To today’s students, anti-apartheid protests are as far away as the Aldermaston marches or Suez crisis were to my generation.

This is only one way in which there’s a generational gulf between today’s students and my generation. Douglas Adams proposed the following rules about attitudes to technology:

1.Anything that is in the world when you’re born is normal and ordinary and is just a natural part of the way the world works.

2. Anything that's invented between when you’re fifteen and thirty-five is new and exciting and revolutionary and you can probably get a career in it.

3. Anything invented after you're thirty-five is against the natural order of things.

These surely apply. I suspect my generation’s default setting is to think of books rather than the internet as the repository of research, and to regard Spotify and Tinder as novelties.

Or take attitudes to football. My generation was brought up to think of Liverpool as the dominant team in England. But they’ve not won the league since 1990. To today’s students, Rush and Dalglish are as temporally distant as Stan Cullis was to us.

Or music. The Spice Girls are as temporally distant to today’s students as the Beatles were to us. And “old skool” dance music – the music of the early 90s – is as distant as 1950s rock n roll was to us.

I suspect this is true of political attitudes too. Take four examples:

- My formative years were shaped by overt class struggle: the strikes of the 70s and 80s and Thatcher’s attacks on unions. To today’s young people, class is less salient – which is, of course, not to say that it’s less important.

- In my day, there were fewer graduates and hence less competition for good jobs. Today’s students face more of a buyers’ market, and so must be more career-oriented whist at university.

- 50- and 60-somethings grew up under the threat (which might have been exaggerated) of the Soviet Union. We had therefore a large and obvious example of the dangers and costs of a lack of political freedom. Today’s young people don’t have so salient an example, and so might be less aware of the value of free speech and discussion.

- My generation grew up in violent times: today’s youngsters didn’t so much*. I suspect this might shape attitudes in all sorts of ways, because we are less likely to regard others as threats. But it might help explain campus politics: students worry about “microaggressions” because they don’t have bigger aggressions to fret about.

In saying all this, I’m taking a Humean position. There is a big difference between impressions and ideas. Our direct experiences, reports by our friends and TV news stories have a more forceful effect upon our minds than what we read about in books. My knowledge of WWII is of a very different kind to that of my grandparents.

This, I think, is also the presumption of a lot of identity politics: growing up as, say, black or gay or a woman gives us different presumptions and instincts than we’d have if we grew up white, straight or male. But the same, surely, is true for cohorts; growing up in the 1970s gives you different presumptions than growing up in the 00s.

This is not to say that generational cleavages must be massive and confrontational, any more than other identity-based ones must be. Instead, my point is simply that we must be aware of these differences – and we never will be if we don’t try.

February 19, 2016

It’s appropriate that Martin Wolf’s criticism of proposals to introduce more market forces into higher education should appear the day after Man Utd’s abject defeat to Midtjylland. This is because football clubs and universities – and in fact big businesses – have something in common.

That something is the power of history. As Martin says, universities rely upon reputation, and reputation is built over time. Oxford is one of the world’s best universities not because it is remarkably well-managed, but because of its history.

Exactly the same is true for football clubs. Man Utd still get capacity crowds not because they are playing brilliant football – as their fans noted last night, they are not – but because they benefit from a loyalty built up over decades. People watch Man Utd not to savour the sublime talent of Marouane Fellaini or workrate of Memphis Depay but because they got hooked on Best-Law-Charlton-Scholes. Similarly, Oxford’s reputation owes far more to Evelyn Waugh than it does to its here today-gone tomorrow-forgotten the day after Vice Chancellor*.

What’s true of football clubs and universities is also true for big companies. If I ask you to picture, say, Ford or Coca-Cola, the image that comes to mind might well be one from decades ago.

What Edmund Burke said of society applies to organizations – at least those with big brands. They are “partnerships . . . not only between those who are living, but between those who are living, those who are dead, and those who are to be born.”

And brands generate rents: if you spend £30,000 on a BMW you’re buying £20,000 worth of car and £10,000 worth of badge. I get paid for working at the IC but not for blogging because the IC has, over the years, built a monetizable brand. The Glasers take cash out of Man Utd thanks to a brand built by past players and managers. One of the strongest facts about CEO pay is that it is correlated with firm size (pdf), but that size is often a product not of the CEO’s own efforts but of historic growth. As Barack Obama said (in a different but applicable sense), “you didn’t build that.”

In all these cases, what’s going on is a form of exploitation. Bosses and workers today are making money not (just) from their own efforts, but from the work of their predecessors. They are not (just) value-adders but value-estractors.

Of course, this point generalizes. I owe my income not just to the IC’s history but to British history generally. I’m rich not because of my talents but because as Gary Lineker says I was fortunate enough to be born in this country rather than in one that hasn’t enjoyed three centuries of economic growth.

All this provides a justification for (globally) redistributive income taxes. But perhaps it justifies more than that. Seen from this Burkean perspective, bosses of great organizations – universities, businesses, whatever - are merely custodians of them. This makes it all the more necessary to restrain their power by more collective forms of leadership – a point which is all the more true because there are also other cases for restricting bosses’ control and empowering workers.

* I was going to say that its reputation is founded upon the calibre of its graduates, such as um, err -wait they’ll come to me.

February 18, 2016

Is high personal debt a threat to the UK economy? Vince Cable thinks so. He told radio 4 yesterday (9’28” in):

A sudden change in household confidence – people beginning to get alarmed about their debt levels – could trigger a serious downturn.

This is a more ideological claim than you might think.

First,some economics. As Simon says, the question of what is the right level of debt is a very tricky one, not least because so much depends upon the distribution of debt. In fact, it’s possible that high consumer debt far from being a bad thing is in fact to be welcomed, because it’s a sign that households might be rightly optimistic about the future.

What’s more, history tells us that consumer-led downturns are quite rare. Since data began in 1955, there have been 45 calendar quarters in which real GDP fell. In only 11 of these did consumer spending fall by more – and several of these were in response to increases in sales taxes (1968Q2, 1975Q3 and 1979Q3) interest rates or oil prices (1980Q4). It’s rare therefore for an exogenous drop in consumer spending to trigger a recession. More often, consumer spending acts as a stabilizing force.

Recessions are far more often due to errors by those in power than to consumers: policy-makers setting interest rates wrongly; corporate bosses investing too much and then retrenching; or bankers cutting credit after making bad loans.

This is why I say Cable’s claim is ideological. In inviting us to worry about the alleged irrationalities of consumers, he is deflecting attention away from what has more often been the threat to our prosperity – the errors of our rulers*. In this way, a question that might undermine the legitimacy of the rich and powerful – do bosses, banks and policy-makers know what they are doing? – is not asked.

From this perspective, there’s a link with the fuss over Peter Tatchell being “no-platformed.” The kerfuffle over students’ wanting to limit cognitive diversity distracts us from a more pernicious form of no-platforming – the Westminster bubble’s narrowing of the Overton window to exclude many ideas from debate. It expects us to give a toss what a criminal associate thinks about Brexit whilst underplaying or ignoring more serious issues such as the cases for a citizen’s income or worker democracy or what to do about the UK’s lamentably low productivity.

What we see in both cases is a means of shoring up inequalities of power: fretting about consumer debt or silly student politics whilst underplaying the greater defects of the powerful help to legitimate the latter.

You might think I’m making a Marxist point here. Maybe. But I’m also channelling another classical economist – Adam Smith:

We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent. (Theory of Moral Sentiments, I.III.29)

* In fairness, such errors might be occasionally inevitable because we can only have limited knowledge of complex emergent processes.

February 17, 2016

The claim by Rebecca Taylor in the FT that “today’s 25-year-olds need to save the equivalent of £800 a month over the next 40 years to retire at 65 with an income of £30,000 a year” has met with much mirth. Perhaps Ms Taylor thinks millennials should sack one of their junior footmen to raise the cash.

Her claim embodies one of the things I hate about financial journalism – the tendency for advertising to masquerade as “expert” advice. A representative of the financial “services” industry wants us to hand over our money to that industry where a lot of it will disappear in management charges. There’s a surprise.

And guess what? Her claim is deeply questionable.

First, the maths. If you save £800 per month in real terms then, assuming a real return of three per cent per year, you’ll end up with over £720,000 after 40 years. An income of £30,000 per year represents only just over 4% of this. Ms Taylor seems to be assuming some combination of low returns, a long retirement or a desire to leave a bequest. All are possible, but dubious.

So, should young people try to save? There are three reasons to do so:

- The power of compounding. If you start saving £800 per month at 25, you’ll end up with over £720,000 at age 65. But if you only start when you’re 35, you’ll end up with less than £460,000. The first £96,000 you save will therefore make you over £260,000. This is because 3% per year compounds nicely over 30+ years.

- Your earnings might not increase with age, so you can’t bet on being able to save later. This isn’t just because robots might take your job. You might just want to jump off the treadmill. I’m earning less (in nominal terms) now than in my late 20s.

- Job satisfaction doesn’t increase with age. Sure, if you’re lucky you’ll be doing more interesting work. But this is offset by an increased awareness that life is short and hence that there are other things you’d rather do with your time. If you save when you’re young, you might be able to afford to retire early.

- In extreme old age – when your health is gone - you can’t enjoy (pdf) your wealth so much. Holidays aren’t as much fun if your mobility is impaired, and fast cars are useless if your eyesight’s shot.

- You might not need as much as £30,000 per year. This is well above median full-time earnings. And when you stop work, your expenses fall – eg on commuting, work clothes and eating at lunchtime. And we should, with luck, get over £6000 a year from the state pension.

- There’s not much evidence that people saved too little in the past. The IFS estimates that most people approaching retirement have reasonable wealth: insofar as they don’t it’s because they were poor whilst they worked. And the ONS finds that older people are happier than others on average, suggesting that they at least didn’t save so little as to diminish their well-being. Granted, they benefited from rising house and share prices, which millennials might not enjoy. But this suggests that, if people weren’t irrationally spendthrift in the past, they might not be so today.

- Spending, like saving, can increase our future happiness. It can create happy memories, or a stock of consumption capital and leisure skills which allow us to better enjoy our retirement. As JP Koning says, consumption can be a long-lived asset.

- You might not live long. “He who dies rich dies disgraced” said Andrew Carnegie. He might have added that he also dies disappointed, as he missed on doing better things with money than saving.

On balance, the decision about how much to save is a tricky one, and probably impossible to get entirely right: we can save too much, as well as too little. This, I think, is one case for a decent state pension - it diminishes our need to make impossible decisions. Whatever the answer is, though, I doubt we’ll find it in the special pleading of vested interests.

February 16, 2016

Ronnie O’Sullivan yesterday gave us a nice example of the limitations of basic economics. He turned down the chance to go for a 147 break because the £10,000 prize for doing so was “too cheap.”

This is an example of how incentives can backfire. Had there been no prize for doing so, I suspect O’Sullivan would have gone for the maximum, because he's a showman. Instead, he took umbrage at the meanness of the reward.

In this sense, he behaved just like the parents of children at the Israeli kindergartens described in a famous paper (pdf) by Aldo Rustichini and Uri Gneezy. They show that when the kindergartens introduced small fines for parents who collected their children late, the number of late-comers actually increased.

What happened in both cases is motivational crowding out: financial incentives can displace intrinsic ones. Small fines crowded out parents’ desire to help kindergarten staff by being punctual, just as a small prize pot crowded out O’Sullivan’s desire to play brilliantly. This is no mere curiosity. One reason for banks’ serial criminality – PPI mis-selling. Libor rigging, forex fixing and so on – is that bonus culture has driven out any sense of professional ethics.

Daniel Pink, author of Drive, has described this crowding out as “one of the most robust findings in social science”: see this paper (pdf) by Edward Deci and colleagues or this by Bowles and Reyes for more evidence.

You might object that incentives only backfire in these cases because they are too small: O’Sullivan would have gone for the 147 if the prize were bigger.

However, big incentives can also backfire. The Yerkes-Dodson law says that people can become over-motivated and so “choke” under pressure: other work by Uri Gneezy has established this experimentally. Who can forget John Terry’s penalty miss in the 2008 Champions League final? (And who would want to?)

These are not the only ways in which incentives can fail. There are others:

- Performance-related pay can encourage people to hit targets at the expense of the organizations’ wider goals. If teachers “teach to the test” they might fail to instil in children a love of learning, and if bosses are incentivized to hit quarterly earnings’ targets they abandon longer-term strategy. For a formal model of this, see Benabou and Tirole (pdf).

Rewards, by their very nature, narrow our focus… Rewarded subjects often have a harder time seeing the periphery and crafting original solutions. (Drive p44-46)

- Big bonuses can signal that the task is very difficult, or even impossible. This might demotivate existing staff, or have adverse selection effects, insofar as only irrationally overconfident people will apply for the job.

- Bonuses can encourage people to free-ride on others’ efforts. They can also encourage slacking, if workers give up after they have met their targets, or excessive risk-taking as workers become desperate to meet their targets.

Tim Worstall is right to say that the core concept in economics is that incentives matter. However, they can matter in unpredictable ways.

The point here is a simple one. Designing incentives – in companies, sport, public services or wherever – require careful thought. More thought, in fact, than is often given. I fear that, in the real world, “incentives” in fact serves an ideological function described by George Carlin:

Conservatives say if you don’t give the rich more money, they will lose their incentive to invest. As for the poor, they tell us they’ve lost all incentive because we’ve given them too much money.

February 11, 2016

What I mean is that banks are risk-magnifiers. When they lose money, credit to the whole economy gets choked off, thus causing recession. Banks are critical hubs in a network economy.

Put it this way. In the 2008 financial crisis, the US’s biggest financial institutions lost between them less than $150bn. But during the tech crash of 2000-03 investors in US stocks lost over $5 trillion. The former led to a great depression, the latter to only the mildest of downturns. Why the difference? One big reason is that losses are easier to bear if they are spread across millions of (mostly unleveraged) people, but cause real trouble if they are concentrated in a few leveraged strategically important institutions.

One reason why non-financial stocks have fallen recently is that investors fear a repeat of 2008 – a fear which is all the greater because banks are so opaque. Yes, the bosses of Deutsche and Credit Suisse claim that they are sound – but nobody believes bosses these days. As Nicholas Taleb said, bankers are “not conservative, just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug.”

I suspect the CAPM has got things backwards. It says that banks fall a lot when the general market falls because they are, in effect, a geared play upon the general market. But sometimes, the market falls because banks fall.

Which leads me to the case for nationalization. This wouldn’t prevent banks losing money: these are inevitable sometimes because of complexity, bounded rationality and limited knowledge. However, when banks are nationalized, their losses would create only a very minor problem for the public finances as governments borrow money to recapitalize them*. That needn’t generate the fears of a credit crunch or financial crisis that we’ve seen recently. In this sense, nationalization would act as a circuit-breaker, preventing blow-ups at banks from damaging the rest of the economy. (Given that countries are exposed to financial crises overseas, the full benefit of this requires that banks be nationalized in all countries).

You might reply that the same effect could be achieved by demanding that banks were better capitalized, as Anat Admati and Martin Hellwig have argued: calls for 100% reserve banking are to a large extent just an extreme version of this.

However, the former would require massive share issues, which would themselves hurt stock markets. And the transition to the latter – as even its advocates acknowledge - would be complex: in fact, Frances has argued that it would kill off commercial banking. Nationalizing banks would be simpler.

You might object that doing so would impose losses upon shareholders, and the adverse wealth effects would depress demand. I’m not sure. By reducing the chances of future financial crises, the risk premium on non-financial stocks should fall, causing their prices to rise. And to the extent that banks have a positive net present value at all, their transfer to the public sector represents not a loss of wealth but a mere transfer: what bank shareholders lose, the tax-payer gains. The only wealth loss would come if banks are worse-managed in the public sector than they would be in the private – and that’s a low bar. Net, there might well be a positive wealth effect.

My point here is, however, a broader one. One fact illustrates it. During the golden age of social democracy – from 1947 to 1973 – UK real total equity returns averaged 5.1% per year. If we take the fall of the Berlin wall in 1989 as its starting point, they have returned 4.9% per year in the “neoliberal" era. This alerts us to a possibility – that perhaps some social democratic policies are in the interests not just of workers but of shareholders too. Maybe the beneficiaries of neoliberalism are fewer than one might imagine.

* Because losses are most likely to happen when the economy is depressed, such borrowing would be done when demand for gilts is high and borrowing costs low. In fact, in such depressed conditions there might well be a case for quantitative easing, whereby the Bank of England buys the bond issues directly.